Social Security: How Those 45 and Younger Could See Benefits Cut

Find out why younger workers could see a hit to their benefits in the future.

Most Americans know all too well about the financial crisis that faces the Social Security system. The most recent Social Security Trustees Report noted that it anticipates the program's trust fund to run out of money by 2034 and, without further action, automatic benefit cuts of more than 20% will likely be necessary to make up for the shortfall between what Social Security collects in payroll taxes and what it has to pay recipients.

In order to resolve Social Security's financial problems, proposed solutions include raising taxes, or changing the way that the program pays future benefits. Because of the political dangers of tackling the situation, the government has thus far taken no action toward a long-term solution. However, if you turn back the calendar more than 30 years, history offers a hint of what the possible solution might turn out to be. If lawmakers follow the same course, then those age 45 and below could have to make sacrifices in their future Social Security benefits in order to ensure that older Americans receive full payments.

Source: Office of the Inspector General, Social Security Administration.

The history of fixing Social SecurityBack in 1983, lawmakers faced huge threats to Social Security. Years of inflation had led to increased cost-of-living adjustments, and payroll tax revenue had failed to keep up. In order to ensure the sustainability of Social Security, the divided government had to find a compromise that would satisfy lawmakers in both parties.

In the end, the Social Security Amendments of 1983 accelerated payroll-tax increases and implemented provisions to include up to half of Social Security benefits as taxable income for what, at the time, were upper-middle-class taxpayers. But the amendments balanced those short-term proposals with longer-term changes that were aimed squarely at younger workers.

Specifically, the amendments to Social Security raised the full retirement age from 65 to 67. But instead of doing so immediately, changes were phased in gradually over a span of 22 years. For those who were 45 in 1983, the full retirement age was raised to 65 plus two months, with those born in each successive year adding two months until the full retirement age reached 66 for those born between 1943 and 1954. Those who were 28 or younger in 1983 will face even bigger reductions, with those born in 1955 having a full retirement age of 66 and two months. The retirement age will max out at 67 for those born in 1960 and after.

Headed for 70?Higher retirement ages affect retirees in two ways. The 1983 amendments didn't prevent people from claiming early retirement at age 62, but the higher full-retirement age leads to a bigger reduction in benefits for those who take them at their earliest opportunity. If a similar increase happens now, then those who would get delayed retirement credits for waiting beyond full retirement age will receive smaller bumps up in their monthly payments, because they'll have fewer months' worth of credit between a higher full-retirement age, and their maximum benefit at age 70.

The government has considered proposals to raise the retirement age even further, with some considering increases to as high as 70 years old. In order to minimize friction, lawmakers are likely to seek once again to put the full onus of retirement-age increases on younger Americans. If future legislation follows the framework of the 1983 amendments, then those born in 1970 or later could start to see retirement ages rise by a couple of months per year until they hit 68 or 69 and, after a possible period of stability, further increases as high as 70 could affect those in their 20s and younger.

Without further adjustments, raising the retirement age would reduce early retirement benefits by five percentage points per year. It would eliminate the eight percentage point per year delayed retirement credit for as many years as the full retirement age goes up.

Watch out for Social Security changes aheadProposals to increase the retirement age don't appear to be imminent. But, as talk of a Social Security crisis gets louder, you can expect more pressure on the government to make changes to sustain Social Security's long-term future. Raising the retirement age is one tried-and-true way to extend Social Security's life; but younger workers should be especially aware of possible future legislation that would go against their best interests.

Author

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.
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